Advantages and disadvantages of social lending and recommended investments for beginners
Hello, I’m Totti.
In this blogA rookie investor who has a葉 (green leaf) mark, and busy in their main jobwe introducelow-risk investment options that can be started with a small amountfor beginners. This time, we summarize the rapidly growing social lending in Japan.
To conclude,“Social lending is not at all shady.”.
1. What is social lending
Social lending isa service that matches people or companies who want to borrow money with individuals who want to lendvia the Internet. It is often shortened to “sosharen.”
Social lending operators gather money from people who want to lend (individuals) and lend it to those who want to borrow (companies) at a lending rate that includes a fee.Interest rates charged to borrowersplus the service provider’s fee determines the return to investors, so investors do not incur fees themselves.The difference between the lending rate and the social lending operator’s fee is the investor’s yield, so there are no fees for investors.
The difference from banks is thatfunds are often provided to small or start-up companies or for short-term loans that banks would not typically lend to, which social lending operators evaluate and then finance.
2. Benefits of social lending
Social lending has advantages that stocks, mutual funds, and cryptocurrencies do not.
1) No need to react to market fluctuations
Personally, this is the biggest benefit. I also invest in stocks and mutual funds, butmarket volatility is exhausting. In social lending, returns areinterest income, so the interest rate is basically fixed.
As long as there is no default, you won’t fall below your principal, giving you peace of mind. I’ve invested in various things, and after discovering social lending, I finally found the right place for me. I believe it’s the perfect investment for me.
2) Reasonable yields
On each company’s site, Maneo and SBI Social Lending offer yields of 5–10%, and Cloud Bank averages around 6.8% (2017 results).
Compared with long-term government bonds and bank deposits, the yields are higher.
However,yield is a measure of risk. ...Yield means risk. It’s important, so I’ve stated it twice.A higher yield means a higher risk of default or other issues with the borrower.
Some funds exceed 10%, but Ipreferto choose funds with expected yield of about 5–7%.Yields may be lower, butthere are funds with collateral or guarantees.to choose from.
With social lending you can steadily grow your assets at a yield of 5–7%.
3) You can benefit from compounding
Here it comes—the compounding that appears often on this blog. The greatest invention in human history, compounding.
In simple terms, compounding means“interest on interest on the principal”. For example, with a 1,000,000 yen principal and 5% interest, you get repaid at 1,050,000 yen. If you reinvest this 1,050,000 yen as the new principal, you’ll earn 5% on it, about 1,100,000 yen.
Repeat this! If you invest 1,000,000 yen at 7% annual compounding for 10 years, you get...1,967,151 yen after 10 years (roughly doubling)!
With simple interest (on principal only), it would be 1,700,000 yen, so the difference is about 300,000 yen.“Reinvest the interest”, with the power of compound interest,over the long term its power is immense.
4) Easy to leave alone and hassle-free
When you invest in a fund, afterward you don’t need to do anything.Investors cannot withdraw or cancel the loan during the lending period.
In many services, the investable principal is repaid in one lump sum at the end of the loan period (some exceptions exist). When repaid, you’ll receive an email saying “repaid,” so you can confirm the repayment amount. If you reinvest, you choose another fund that is currently募集 (open for investment) and reinvest.
Also, the distribution dates for interest income differ by service.
Interest distribution dates
- Cloud Bank, Maneo, LC Lending – 7th of every month
- SBISL – 15th of every month
- Owners Book – quarterly, on the 20th of March, June, September, and December
3. Cautions about social lending
1) Principal loss and payment delays risk
If the borrower goes bankrupt,default occurs and principal may not be repaid. Of course,,the principal is not guaranteed, so to diversify risk, register small amounts with multiple operators or spread across several funds
There are cases where multiple funds have the same borrower, soavoid selecting the same borrower at the same time as a risk hedge.
In the past, borrowers’ identities weren’t disclosed, leading to concerns about improper use of funds, but nowthe Financial Services Agency is moving to disclose borrowers.When borrowers are disclosedinvestors can properly examine the borrower’s company, which is a big step forward for the industry.By the way, since August 2017 I have invested with several socion lending providers, and so far there have been no confirmed principal losses, but there have been payment delays with Maneo and Cloud Credit.
2) Be careful of opportunity loss periods
After the principal has been repaid with interest, if you want to invest in another fund, a bit of work is required. The process begins again with “new募集 start → investors apply → lending starts,” so you need to re-apply for a new investment.
During the period when you are applying for a new reinvestment option, your funds are not being managed. It isn’t simply that the principal is repaid with interest and finished... you end up in a state where you must reinvest in another fund to avoid idle funds.This is an opportunity loss, so please don’t forget (I often forget).
If you choose only funds with short investment periods, you will repeatedly face the cycle of “募集開始→投資家が申込→貸出スタート,” which increases the opportunity loss during that period.
4. Annual performance disclosure
The operator blog is here
